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UGMA or Savings Bonds
Old 09-13-2013, 06:22 AM   #1
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UGMA or Savings Bonds

My very first grandchild came into this world on 8/7/13. I want to help jumpstart his financial future and was wondering which route would be the best way to go? I had payroll deduction for Savings Bonds for my children many years ago. Are they still a wise investment, or should I explore a UGMA through a mutual fund company?

Thanks for your inputs.

Mike
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Old 09-13-2013, 06:43 AM   #2
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I have done both. I did savings bonds for DD starting back in the 80's. I don't think the return was very good compared to a diversified investment. I would not do that today with today's interest rates. Besides, it was a pain when it came time to redeem them. We had to sign each one and fill out some information on the back. I am not sure if they are virtual these days or if you get an actual piece of paper when you buy the bond.

With DS1 I went the UGMA mutual fund route and both the returns and redemption were much easier.

For DS2 & 3, instead of saving and investing a separate stash, I included the savings in my 401k investments. Advantage: the money is mine, for DD and DS1 the money was in their names, they used it to go to college until the money ran out then they quit college.

For grandchildren I would go with a 529 plan. Advantage: if the grandchild does not go to college the money can be used for another child. You retain some control over the money. Plus, depending on the plan you may have a variety of investment options.
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Old 09-13-2013, 07:49 AM   #3
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Originally Posted by Brett_Cameron View Post
I have done both. I did savings bonds for DD starting back in the 80's. I don't think the return was very good compared to a diversified investment. I would not do that today with today's interest rates. Besides, it was a pain when it came time to redeem them. We had to sign each one and fill out some information on the back. I am not sure if they are virtual these days or if you get an actual piece of paper when you buy the bond.

With DS1 I went the UGMA mutual fund route and both the returns and redemption were much easier.

For DS2 & 3, instead of saving and investing a separate stash, I included the savings in my 401k investments. Advantage: the money is mine, for DD and DS1 the money was in their names, they used it to go to college until the money ran out then they quit college.

For grandchildren I would go with a 529 plan. Advantage: if the grandchild does not go to college the money can be used for another child. You retain some control over the money. Plus, depending on the plan you may have a variety of investment options.
Thank you. If I were to go the route of the UGMA, do I first need to have an account with that mutual fund company or can I just simply open a UGMA account with the minimum required and then add to it at any time?

Thanks
Mike
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Old 09-13-2013, 08:51 AM   #4
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When I was young, my grandfather gave me a Savings Bond. The awesome thing about it was it was something I could physically hold on to and look at. I kept it in my drawer and everytime I saw it, I thought of him and smiled.
My other grandfather gave me shares in a mutual fund. I'd get a statement in the mail every quarter, but it was just something I had to file. Did not bring me the enjoyment the bond did.
Looking back, the mutual fund was a MUCH better gift in terms of financial growth, but as a child, it was awesome to have something tangible like a Savings Bond.
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Old 09-13-2013, 08:52 AM   #5
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My kids had small UGMA accounts with money funded from grandparent. They were a real pain in the ass. The UGMA meant the kids had to file tax returns at one point. Then when they reach the age to cash in, they needed the entire series of transactions over the past 20 years in order to figure out the cost basis. Then they had to pay tax at my rate (see "kiddie tax") on the gains. Also to add insult to injury, 100% of the UGMA was considered part of the expected family contribution (EFC) for college expenses even though grandparent wanted them to use the money after college.

So my advice: Forget about UGMA and UTMA. Instead use a 529 plan or just keep the money in your accounts and give to the grandchild for laptops, overseas school trips, summer camps, etc. Also put them in your will.

But the good thing was watching my kid deal with their tax return and Schedule D and a K-1. That started them on their "financial future" of filling out tax returns for the rest of their life. They also learned that one shouldn't count all the money in the account as theirs since a big chunk goes to the IRS.
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Old 09-14-2013, 07:42 AM   #6
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Originally Posted by wrigley View Post
Thank you. If I were to go the route of the UGMA, do I first need to have an account with that mutual fund company or can I just simply open a UGMA account with the minimum required and then add to it at any time?

Thanks
Mike
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Old 09-14-2013, 07:44 AM   #7
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My kids had small UGMA accounts with money funded from grandparent. They were a real pain in the ass. The UGMA meant the kids had to file tax returns at one point. Then when they reach the age to cash in, they needed the entire series of transactions over the past 20 years in order to figure out the cost basis. Then they had to pay tax at my rate (see "kiddie tax") on the gains. Also to add insult to injury, 100% of the UGMA was considered part of the expected family contribution (EFC) for college expenses even though grandparent wanted them to use the money after college.

So my advice: Forget about UGMA and UTMA. Instead use a 529 plan or just keep the money in your accounts and give to the grandchild for laptops, overseas school trips, summer camps, etc. Also put them in your will.

But the good thing was watching my kid deal with their tax return and Schedule D and a K-1. That started them on their "financial future" of filling out tax returns for the rest of their life. They also learned that one shouldn't count all the money in the account as theirs since a big chunk goes to the IRS.
oh, yeah, I forgot about having to do the tax returns. Yuck.
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Old 09-14-2013, 08:32 PM   #8
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You do know that savings bonds are no longer available in paper form, don't you?
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Old 09-15-2013, 06:50 AM   #9
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Sorry---I can't imagine investing in savings bonds for kids/grandkids when presumably you have a time horizon of 18-21 years. I did not check, but I doubt there have been too many periods that length of time where a basket of equities underperformed a collection of US Savings Bonds. With regard to doing the taxes associated with a UGMA, it is really not that hard or time consuming particularly if one uses TurboTax or similar. We had UGMA accounts for our kids, and I would guess the cumulative time required to do the additional paper work for tax filing over the 15 or so years that we had to file a return for them was maybe 3 or 4 hours. We opened UGMA accounts for our kids prior to the advent of 529s---once the tax legislation creating 529 accounts was enacted, we stopped contributing to the UGMAs and started contributing to the 529s. Most people seem to gift to their grandkids to hep pay for college---seems to me the 529 Plan is the way to go, unless you are setting aside money for them to pay for something beyond college. Finally, I think people today---young people in particular---are getting far more used to living in a virtual world, so not having a tangible paper certificate may mean less to today's youth than it did to us older folks.
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Old 09-15-2013, 07:07 AM   #10
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Originally Posted by David1961 View Post
When I was young, my grandfather gave me a Savings Bond. The awesome thing about it was it was something I could physically hold on to and look at. I kept it in my drawer and everytime I saw it, I thought of him and smiled.
My other grandfather gave me shares in a mutual fund. I'd get a statement in the mail every quarter, but it was just something I had to file. Did not bring me the enjoyment the bond did.
Looking back, the mutual fund was a MUCH better gift in terms of financial growth, but as a child, it was awesome to have something tangible like a Savings Bond.

I can remember my passbook savings account.... savings up my change and going to deposit it in the bank... they printing on it what my balance was and the interest...

I would never have allowed a kid to hold onto a savings bond.... so your experience would never have happened in my house....

Also, as someone mentioned, they are not in paper anymore..... (I did not check, but think it is true).....



Last, the guaranteed interest rate is horrible on savings bonds now.... they used to not be this bad....
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Old 09-15-2013, 07:38 AM   #11
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So my advice: Forget about UGMA and UTMA. Instead use a 529 plan or just keep the money in your accounts and give to the grandchild for laptops, overseas school trips, summer camps, etc. Also put them in your will.
Agreed. Include a 529 plan as a consideration and see how it compares for your situation to UGMA/UTMA.
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Old 09-15-2013, 10:23 AM   #12
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Another reason not to go with the UGMA is that the financial aid formulas basically expect that those fund go to zero over the course of the child's undergraduate work. In other words, those are funds of the student, and anything the student has is expected to get tapped at the rate of about 20% per year. The 529 funds remain yours and hit the FAFSA calculations as parent's assets, so are expected to be spent at a much lower rate (which depends on the number of kids you have, etc.)
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Old 09-15-2013, 11:48 AM   #13
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^I don't think that a 529 plan owned by the grandparent even appears on the FAFSA anywhere.
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Old 09-15-2013, 12:25 PM   #14
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^I don't think that a 529 plan owned by the grandparent even appears on the FAFSA anywhere.
That's my understanding also. I understand that you have to be careful when to use those funds, since once you spend some for education, that same support will be expected the next yr. The conventional wisdom is that you use it for the last yr so it never shows up .
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Old 09-15-2013, 08:12 PM   #15
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Agree with others that you should look into 529.

Bond rate is very low. For that many years, low cost diversify index ETF probably would do much better.

My kids have UGMA. They can be a pain for taxes and not good for need based financial aid.
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Old 09-18-2013, 03:40 PM   #16
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My very first grandchild came into this world on 8/7/13. I want to help jumpstart his financial future...
It might not cost quite as much in the future. But then again, if degrees are cheaper, degreed people might be more common (less in demand).

The Beginning of the End for Skyrocketing College Costs? | Marotta On Money
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Old 09-18-2013, 04:28 PM   #17
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My dad gifted both my sons (his only grandchildren) with 529's seeded with $10k each.
The idea was that he owned the 529's, they were the beneficiaries, and I was the inheritor.
If he'd lived till they reached college - it wouldn't have shown up on the FAFSA forms. And I could contribute to the accounts also. (Kind of sheltering the savings.)

That said - he did pass several years ago (and my kids are still younger than college age.) I inherited the 529's... and fund them faithfully.
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